36464 Federal Register / Vol. 63, No. 128 / Monday, July 6, 1998 / Notices

9 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3Securities Exchange Act Release No. 39819

(March 30, 1998) 63 FR 16841 (April 6, 1998).

4See letter from Robert E. Aber, Senior Vice

President and General Counsel, Nasdaq, to Richard

Strasser, Assistant Director, Division, of Market

Regulation (‘‘Division’’), SEC, dated April 29, 1998.

Securities Exchange Act Release No. 39819

discussed Amendment No. 1 and Amendment No.

2 to the filing, which were filed with the

Commission on March 25, and 26, 1998,

respectively.

5See Securities Exchange Act Release No. 39936

(April 30, 1998) 63 FR 25253 (May 7, 1998).

6See letter from Robert E. Aber, Senior Vice

President and General Counsel, Nasdaq, to Richard

Strasser, Assistant Director, Division, SEC, dated

June 24, 1998.

7On August 29, 1996, the Commission

promulgated a new rule, the Limit Order Display

Rule (Exchange Act Rule 11Ac1–4) and adopted

amendments to the Quote Rule (Exchange Act Rule

11Ac1–1), which together are designed to enhance

the quality of published quotations for securities

and promote competition and pricing efficiency in

U.S. securities markets (collectively, the ‘‘Order

Handling Rules’’). See Securities Exchange Act

Release No. 37619A (September 6, 1996) 61 FR

48290 (September 12, 1996).

8See Securities Exchange Act Release No. 38294

(February 14, 1997) 62 FR 8289 (February 24, 1997)

(approving temporary suspension of PMM

standards); Securities Exchange Act Release No.

39198 (October 3, 1997) 62 FR 53365 (October 14,

1997) (extending suspension through April 1, 1998);

Securities Exchange Act Release No. 39819 (March

30, 1998) 63 FR 16841 (April 6, 1998) (extending

suspension through May 1, 1998); Securities

Exchange Act Release No. 39936 (April 30, 1998)

63 FR 25253 (May 7, 1998) (extending suspension

through July 1, 1998).

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. 552, will be

available for inspection and copying in

the Commission’s Public Reference

Room, 450 Fifth Street, NW.,

Washington, DC. Copies of such filing

also will be available for inspection and

copying at the NASD. All submissions

should refer to File No. SR–NASD–98–

43 and should be submitted by July 27,

1998.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.9

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–17710 Filed 7–2–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40140; File No. SR–NASD–

98–26]

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Accelerated Partial Approval to

Amendment No. 4 to Proposed Rule

Change by the National Association of

Securities Dealers, Inc. to Institute, on

a Pilot Basis, New Primary Nasdaq

Market Maker Standards for Nasdaq

National Market Securities

June 26, 1998.

I. Introduction

On March 19, 1998, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’ or ‘‘Association’’), through its

wholly-owned subsidiary, The Nasdaq

Stock Market, Inc. (‘‘Nasdaq’’),

submitted to the Securities and

Exchange Commission (‘‘SEC’’ or

‘‘Commission’’), pursuant to Section

19(b)(1) of the Securities Exchange Act

of 1934 (‘‘Exchange Act’’) 1 and Rule

19b–4 thereunder,2 a proposed rule

change to: (a) implement, on a pilot

basis, new Primary Nasdaq Market

Maker (‘‘PMM’’) standards for all

Nasdaq National Market (‘‘NNM’’)

securities; (b) extend the NASD’s Short

Sale Rule pilot until November 1, 1998;

and (c) extend the suspension of

existing PMM standards until May 1,

1998. On March 30, 1998, the

Commission issued notice of the filing

and approved, on an accelerated basis,

the portions of the filing extending the

NASD’s Short Sale Rule pilot and the

suspension of existing PMM standards.3

On April 30, 1998, Nasdaq filed

Amendment No. 3 to the proposal,4

proposing to: (a) extend the comment

period by 30 days to May 27, 1998; (b)

continue to suspend the current PMM

standards until July 1, 1998; (c) extend

the NASD’s Short Sale Rule pilot until

January 4, 1999; (d) change the dates

during which the PMM pilot would run

to July 1, 1998, through January 4, 1999;

and (e) amend subparagraph (g) of

NASD Rule 4612 to change the method

for determining how market makers that

are not managers or co-managers in an

underwriting syndicate of a secondary

offering may qualify as PMMs. Also on

April 30, 1998, the Commission issued

notice of Amendment No. 3 and

approved, on an accelerated basis,

Nasdaq’s request to continue to suspend

the current PMM standards until July 1,

1998.5 The Commission also extended

the comment period for the proposed

rule change.

On June 24, 1998, Nasdaq filed

Amendment No. 4 to the proposal,6

proposing to: (a) extend the comment

period to July 27, 1998; (b) continue to

suspend the current PMM standards

until October 1, 1998; and (c) change the

dates during which the PMM pilot

would run to October 1, 1998, until

April 1, 1999.

Background

Presently, NASD Rule 4612 provides

that a member registered as a Nasdaq

market maker pursuant to NASD Rule

4611 may be deemed a PMM if that

member meets certain threshold

standards. The implementation of the

SEC Order Handling Rules 7 and what

some perceive as a concurrent move

toward a more order-driven, rather than

a quote-driven, market raised questions

about the continued relevance of those

PMM standards. As a result, such

standards were suspended beginning in

early 1997.8 Currently, all market

makers are designated as PMMs.

Since February 1997, Nasdaq has

worked to develop PMM standards that

are more meaningful in what may be an

increasingly order-driven environment

and that better identify firms engaged in

responsible market making activities

deserving of the benefits associated with

being a PMM, such as being exempt

from NASD Rule 3350, the NASD’s

Short Sale Rule. The NASD now

proposes to extend the current

suspension of the existing PMM

standards and to implement new

standards on a pilot basis from October

1, 1998, until April 1, 1999. The NASD

intends the new standards to better

evaluate whether a market maker

provides meaningful liquidity to the

market. To determine whether a

particular market maker is such a

provider of liquidity, Nasdaq will

analyze that market maker’s trading

activity using a new test.

For the reasons discussed below, the

Commission has determined to grant

accelerated approval of Nasdaq’s

request, in Amendment No. 4, to

continue to suspend the current PMM

standards until October 1, 1998.

Further, given the proposal’s complexity

and the Commission’s desire to give the

public sufficient time to consider the

proposal, the Commission has extended

the comment period to the proposed

rule change, as amended, to July 27,

1998.

II. Proposed Rule Change

As discussed in detail in Securities

Exchange Act Release No. 39819,

Nasdaq is proposing a new set of PMM

standards. In the current filing, Nasdaq

would amend the timing of the

proposed pilot through which the

NASD, the SEC, and the public may

evaluate those new standards.

* * * * *
Federal Register / Vol. 63, No. 128 / Monday, July 6, 1998 / Notices 36465

9 15 U.S.C. 78o–3(b)(6). 10See http://www.nasdaqtrader.com.

The proposed rule language, as

amended, follows. Additions are

italicized; deletions are bracketed.

Rule 4612

(a)–(g) No Change

(h) [The Board of Governors may

modify the threshold standards set forth

in paragraphs (a) and (b) above if it finds

that maintenance of such standards

would result in an adverse impact on a

class of investors or on Nasdaq.] This

rule shall be in effect beginning October

1, 1998, and remain in effect until April

1, 1999.

* * * * *

III. Discussion

After careful consideration, the

Commission has concluded, for the

reasons set forth below, that the

extension of the current suspension of

existing PMM standards until October 1,

1998, is consistent with the

requirements of the Exchange Act and

the rules and regulations thereunder.

Extending the suspension of the current

PMM standards to accommodate

implementing the new pilot is

consistent with Section 15A(b)(6) 9 of

the Exchange Act. Section 15A(b)(6) of

the Exchange Act requires that the

NASD’s rules be designed, among other

things, to remove impediments to and

perfect the mechanism of a free and

open market and a national market

system and to promote just and

equitable principles of trade. The

Commission believes that continued

suspension of the current PMM

standards will facilitate Nasdaq’s efforts

in implementing more meaningful PMM

standards which should help to enhance

market liquidity by rewarding those

market makers that meet the new

standards. As a result, continuing the

suspension of the current PMM

standards is consistent with Section

15A(b)(6) of the Exchange Act.

In finding that the suspension of the

existing PMM standards is consistent

with the Exchange Act, the Commission

reserves judgment on the merits of the

NASD’s Short Sale Rule, any market

maker exemptions to that rule, and the

proposed new PMM standards. The

Commission recognizes that the Short

Sale Rule already has generated

significant public comment. Such

commentary, along with any further

comment on the interaction of the Short

Sale Rule with the proposed new PMM

standards, will help guide the

Commission’s evaluation of the Short

Sale Rule and new PMM standards.

During the PMM pilot period, the

Commission anticipates that the NASD

will continue to address the

Commission’s questions and concerns

and provide the Commission staff with

any relevant information about the

practical effects and the operation of the

revised PMM standards and possible

interaction between those standards and

the NASD’s Short Sale Rule.

As proposed, the new PMM standards

will become effective October 1, 1998,

when the suspension of the existing

PMM standards, under Amendment No.

4, expires. Nasdaq notes that currently

all market makers registered in a

security are PMMs due to the

suspension of the previous PMM

standards, and will continue to be so

designated on the pilot’s proposed start

date of October 1, 1998. Under the onemonth look-back provision in the PMM

pilot program, Nasdaq will consider the

previous calendar month and the

current month to determine a market

maker’s continued PMM eligibility if the

market maker attained PMM status in a

security during the previous month, but

fails to meet the applicable thresholds

for the current month. To give PMMs

the full benefit of the one-month lookback period and to allow market makers

time to adjust their trading activity to

the new standards, Nasdaq proposes to

implement the new standards so that no

market maker that is designated as a

PMM when the pilot begins on October

1, 1998, will lose its PMM status—based

on a failure to meet the new PMM

standards—until December 3, 1998.

Nasdaq believes, and the Commission

agrees, that it is fair to give market

makers this time to make necessary

adjustments to their trading activity to

help them maintain their PMM

designation, particularly since PMM

standards have been suspended for

more than a year and the proposed new

PMM standards are more stringent than

the previous standards. The PMM pilot,

pursuant to Amendment No. 4, would

run until April 1, 1999.

The Commission finds good cause for

approving the extension of the

suspension of existing PMM standards

prior to the 30th day after the date of

publication of notice of the filing in the

Federal Register. It could be disruptive

to market making to reintroduce

outdated PMM standards for a brief

period prior to implementing a new

PMM pilot. Further, the current PMM

standards have been suspended until

July 1, 1998, at which time the old PMM

standards—which are not a meaningful

measure of a market maker’s liquidityproviding activity—would be used again

to determine market makers’ PMM

status. To ensure continuity in the PMM

standards and the regulation of short

selling activity, to maintain orderly

markets, and to avoid confusion, it is

necessary to continue the suspension of

the prior PMM standards until the new

standards are implemented on October

1, 1998.

IV. Solicitation of Comments

Given the proposal’s complexity and

the Commission’s desire to give the

public sufficient time to consider the

proposal, the Commission hereby grants

Nasdaq’s request to extend the comment

period for the proposed rule change, as

amended, to July 27, 1998. Since

making the proposal, the NASD has

issued reports to all Nasdaq market

makers in NNM issues to show how

those market makers would have

performed for April and May of 1998

had the proposed PMM standards been

in place. The NASD also posted on The

Nasdaq Trader Web Site 10 a stock-bystock analysis of what percentage of

market makers in each stock would have

been PMMs under the proposed PMM

standards in April and May of 1998. The

Commission expects such data will

allow market participants to submit

more meaningful comments.

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing,

including whether the proposed rule

change is consistent with the Exchange

Act. In particular, the Commission

requests that commenters provide

alternative PMM standards, explaining

why such alternative standards better

identify and reward market participants

who provide meaningful liquidity to the

Nasdaq market. Persons making written

submissions should file six copies

thereof with the Secretary, Securities

and Exchange Commission, 450 Fifth

Street, N.W., Washington, DC 20549.

Copies of the submission, all subsequent

amendments, all written statements

with respect to the proposed rule

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. § 552, will be

available for inspection and copying in

the Commission’s Public Reference

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the NASD. All

submissions should refer to File No.

SR–NASD–98–26 and should be

submitted by July 27, 1998.
36466 Federal Register / Vol. 63, No. 128 / Monday, July 6, 1998 / Notices

11 15 U.S.C. 78s(b)(2).

12 In partially approving the proposal, the

Commission has considered the approved portion’s

impact on efficiency, competition, and capital

formation. Moreover, the pilot program, if fully

implemented, likely will provide the Commission

with data necessary to enable it to evaluate the

impact of the proposed PMM standards on the

Nasdaq market and market participants. 15 U.S.C.

78c(f).

13 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3 17 CFR 240.11Ac1–4.

4 17 CFR 240.11Ac1–1.

5See Exchange Act Release No. 37619A

(September 6, 1997) 64 FR 48290 (September 12,

1996).

6See Exchange Act Release No. 38156 (January

10, 1997) 62 FR 2415 (January 16, 1997) (order

partially approving SR–NASD–96–43).

7 Id.

8The Actual Size Rule does not affect a market

maker’s obligation to display the full size of a

customer limit order. If a market maker is required

to display a customer limit order for 200 or more

shares, it must display a quote size reflecting the

size of the customer’s order, absent an exception

from the Limit Order Display Rule. Market makers

may display a greater quotation size if they so

choose or if required to do so by the Limit Order

Display Rule.

9See NASD Rule 4613(a)(2).

10See Exchange Act Release No. 39285 (October

29, 1997), 62 FR 59932 (November 5, 1997).

11See Exchange Act Release No. 39760 (March

16, 1998) 63 FR 13894 (March 23, 1998) (SR–

NASD–98–21).

V. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Exchange Act,11

that the portion of Amendment No. 4 to

the proposed rule change, SR–NASD–

98–26, that extends the suspension of

the current PMM standards to October

1, 1998, be and hereby is approved on

an accelerated basis.12

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.13

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–17718 Filed 7–2–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40139; File No. SR–NASD–

97–26]

Self-Regulatory Organizations;

National Association of Securities

Dealers, Inc.; Notice of Filing and

Order Granting Accelerated Approval

to Amendment No. 5 Relating to an

Extension of the Pilot for the NASD’s

Rule Permitting Market Makers To

Display Their Actual Quotation Size

June 26, 1998.

I. Background

On June 25, 1998, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’), through its wholly-owned

subsidiary, The Nasdaq Stock Market,

Inc. (‘‘Nasdaq’’), filed with the

Securities and Exchange Commission

(‘‘Commission’’ or ‘‘SEC’’) Amendment

No. 5 to a proposed rule change

pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Exchange Act’’),1 and Rule 19b–4

thereunder,2 to amend NASD Rule

4613(a)(1)(C), seeking to extend through

July 31, 1998, the pilot program in

which market makers may quote their

actual size (i.e., one normal unit of

trading) in 150 Nasdaq stocks (‘‘Actual

Size Rule’’).

The Commission is publishing this

notice to solicit comments from

interested persons and is approving

Amendment No. 5 on an accelerated

basis.

II. Proposed Rule Change

The NASD proposes to amend NASD

Rule 4613(a)(1)(C) to extend the Actual

Size Rule through July 31, 1998. The

text of the proposed rule change is as

follows. (Additions are italicized;

deletions are bracketed.)

* * * * *

4613. Character of Quotations

(a) Two-Sided Quotations

(1) No Change

(A)–(B) No Change

(C) As part of a pilot program

implemented by The Nasdaq Stock

Market, during the period January 20,

1997 through at least [June 30, 1998]

July 31, 1998, a registered market maker

in a security listed on the Nasdaq Stock

Market that became subject to

mandatory compliance with SEC Rule

11Ac1–4 on January 20, 1997 or

identified by Nasdaq as being otherwise

subject to the pilot program as expanded

and approved by the Commission must

display a quotation size for at least one

normal unit of trading (or a larger

multiple thereof) when it is not

displaying a limit order in compliance

with SEC Rule 11Ac1–4, provided,

however, that a registered market maker

may augment its displayed quotation

size to display limit orders priced at the

market maker’s quotation.

* * * * *

III. Discussion

On August 29, 1996, the Commission

promulgated a new rule, the Limit Order

Display Rule 3 and adopted amendments

to the Quote Rule,4 which together are

designed to enhance the quality of

published quotations for securities and

promote competition and pricing

efficiency in U.S. securities markets

(collectively, the ‘‘Order Handling

Rules’’).5 To facilitate implementation

of the Order Handling Rules and

accommodate changes in the Nasdaq

market that these rules brought about,

the Commission later approved a variety

of amendments to NASD Rules

concerning Nasdaq’s Small Order

Execution System (‘‘SOES’’) and the

SelectNet Service (‘‘SelectNet’’).6

In particular, the Commission

temporarily approved a pilot program 7

whereby Nasdaq market makers in the

first 50 stocks subject to the

Commission’s Order Handling Rules

were only required to display a

minimum quotation size of one normal

unit of trading when quoting solely for

their own proprietary accounts.8 For

non-pilot Nasdaq stocks, the minimum

quotations size requirements of 1,000,

500, or 200 shares remained the same.9

Although the first 50 stocks were

chosen to provide a broad cross section

of the most liquid Nasdaq stocks, on

October 29, 1997, the Commission

approved an NASD proposal to amend

NASD Rule 4613(a)(1)(C) to expand the

pilot program to 150 Nasdaq stocks. The

Commission also extended the pilot

until March 28, 1998.10 The additional

100 stocks were part of an enhanced

sample designed to better represent the

entire Nasdaq market. The Commission

approved the expansion in response to

comment letters suggesting that the first

50 stocks did not sufficiently represent

the Nasdaq market because all 20 of the

largest Nasdaq stocks were subject to the

100 share minimum. Thus, some

commenters suggested that it was

difficult to gauge the Actual Size Rule’s

effect on large Nasdaq stocks since there

were no sufficiently large non-pilot

stocks with which to compare those in

the pilot.

The NASD has concluded an analysis

of an expanded pilot, and on March 5,

1998, it filed with the Commission a

proposed rule change to apply

permanently the Actual Size Rule to all

Nasdaq Stocks.11 As part of that filing,

the NASD published a 127-page

economic study of the 150-stock pilot

(‘‘March 1998 Study’’).

In the March 1998 Study, the NASD

concluded that:

• The Actual Size Rule did not affect

the market quality—in terms of spreads,

volatility, depth, or liquidity—of pilot

stocks.

• The Actual Size Rule has not

altered the ability of investors to access

market maker capital. For pilot stocks,